Bubbles cant form without
scarcity or perceived scarcity –a concept too many
economists do not appear to adequately appreciate.

Little
wonder - when many of them don’t appear to know the
difference between “inflation” and “growth” – a
“boom’ and a “bubble” – and unbelievably -
referring to the “wealth effects” of housing inflation
and in acting as “cheerleaders” for inflating bubbles.
Automobiles, computers, household appliances etc seemed to
be able to “withstand” the era of easy money without
inflating in price – something economists have failed to
point out as well.

What Australia and New Zealand have
largely experienced these past few years have been “phony
booms” – driven in the main by housing bubbles. We all
thought we were getting rich flicking houses to one another
– at ever inflating prices.

The evidence is clear,
overwhelming and irrefutable. We only have to compare the
performances of Texas and California to understand the root
cause of the problem. Texas housing stayed at about 2.5
times annual household incomes through this period – with
California blowing out to in excess of 9.0 times and Los
Angeles a stratospheric 11.5 times annual household
incomes.

Have we seen any studies yet of the average
foreclosure costs and quantum of them in relation to the
quantum of mortgages for the States of Texas and California
for example? By my rough guess – the quantum of Texas
foreclosure losses are only about 5% of those of California.
We need to see research on this issue with urgency in my
view.

It is
“enlightening” too - how the “Bubble States” in the
United States are the ones generally (Georgia a mystery –
but the Rust Belt understandable) that are getting
themselves in to serious fiscal problems as illustrated
within “States that cant pay for themselves -
Businessweek” following the recently released report
from the “Center on Budget and Policy
Priorities”. It will be interesting to observe the
basket case of California digging itself out of its fiscal
mess over coming weeks.

California’s “digging” is at
the very early stages – something New Zealand and
Australian politicians should watch with close interest –
because that’s exactly where they are heading. They will
rightly be judged on how they manage this.

It is difficult to accept that the United
States finance sector was “completely blind” to the
risks involved in lending in to the inflating bubble urban
housing markets of California and elsewhere – and was
probably acting responsibly in endeavouring to protect
shareholders interests – in securitizing this “inflation
based lending” - so that others could bear the risks of
it.

Of the approximately $US14 trillion of US household
debt –some $US11 trillion of it is mortgages – and of
that – some $US7 trillion of it has been securitized. It
would appear that the securitized product is currently only
worth around 10 to 20 cents in the dollar – which would
suggest that about $US6 trillion of it has been wiped out.
There is a lot of work to do going forward “unbundling”
it, in an endeavor to restore some value to it. There have
been some suggestions made that around $US2 trillion of it
has been “burnt up” in fees – as the Masters of the
Universe (as the 29 year old geniuses referred to
themselves) thought they were “adding value”.

Any
mortgage debt out there that exceeds three times annual
household income, should be considered “problem debt”
– and as it works its way up through the Multiples – an
even greater problem. Something of course the New Zealand
and Australian finance sector has been in no hurry to
enlighten us about (as we have to endure the
“fundamentally sound” rhetoric from the Reserve Banks
and the Banks themselves).

It is “remarkable” how the
New Zealand Banks are so sound – with around 32 New
Zealand Finance Companies having “tipped up” here over
recent times.

Ms Albrechtsen is indeed correct in that
this homeownership issue needs to stop being a “political
play thing”. The reality is that it should be just as easy
for people to purchase houses (with longer term financing),
as it is for them to purchase automobiles.

The reality is
that Bill Levitt got affordable housing figured out after
World War Two – with single earner households it needs to
be noted - (refer “TIME Magazine Cover: William J. Levitt -
July 3, 1950 - Real Estate - Law”) and this is still
being achieved through most of middle North America (refer
Demographia Surveys). Since 1950 – the United States (and
to a lesser extent -we in New Zealand and Australia) has had
no problem providing housing at between 2.0 to 3.0 annual
household earnings generally (as the Harvard University
Joint Center for Housing Studies “Median Multiple Tables” clearly
illustrate as well).

Ms Albrechtsen then sails in to the
failings of “non recourse mortgages” (where lending
institutions are only allowed to use the house as security)
– but for reasons that are still remain unclear, this did
not work in restraining the finance sectors
“overgenerous” lending as the bubbles inflated. It would
appear that the market pressures through the inflating
bubbles – overcame what should have been disciplines
imposed by “non recourse lending”.

There are merits in
non recourse lending - in acting as a restraint on lending
institutions – and it could well be that this may have
acted as a “dampener” on even more excessive lending.
There is obviously a need for urgent research on this
issue.

After all - “limited liability” is a good idea
with respect to companies. Banks in any event surely don’t
want to be put in the position of “wiping out”
foreclosed homeowners (with children to care for as well)
other assets and leave them absolutely destitute. Better to
have the mortgage lending structured sensibly (if local
government will allow this without artificially inflating
housing) in the first place.

Ms Albrechtsen then goes on
expressing concerns about the American 30 year fixed
interest rates on mortgages – but really - this is very
much a side issue. What is rather surprising is that Banks
have failed to be “truly innovative” in structuring
mortgages that are better linked to the reality that
household incomes increase over time – so that they are
more affordable at the early stages. Even by being moderate
and conservative in allowing for a 1% to 2% annual increase
in household incomes – would assist in allowing more to
access homeownership.

Ms Albrechtsen is correct in stating
that “pre payment penalty restrictions” are
counterproductive and in clearly articulating the negative
impacts of former President Jimmy Carters 1977 Community
Reinvestment Act. And she is “spot on’ about those
“dinosaurs” Fannie Mae and Freddie Mac. New Zealand
rightly shut down the State Advances Corporation years
ago.

Isn’t it remarkable how something as simple and
(what should be) low risk as “house mortgages” should
get so screwed up - to the extent of bringing the global
financial system to its knees. A remarkable feat by urban
planners and the finance sector.

And it is very helpful
indeed that she quoted the Australian Deregulation Minister
Lindsay Tanners wise comments “improving regulation
doesn’t necessarily mean more regulation”. Poor quality
regulations at the National and Local levels are quite
clearly “the root of the problem”.

The finance sector
globally could hardly be accused of being “socially
responsible” through this whole housing bubble fiasco.
Indeed as these bubbles were “inflating” they acted as
“irresponsible cheerleaders”. I cannot recall one
instance where a senior Bank officer warned of what should
have been the obvious sheer destructiveness of these
inflating and deflating housing bubbles.

Globally – many
within the finance sector will pay the price for this as the
“Masters of the Universe” are transformed in to
government employees as their institutions are increasingly
regulated, bailed out and nationalized in varying degrees
– and Banking generally reverts back to utility status.

Getting the recovery process underway – the focus must
be on sorting out urban fringe land supply and appropriate
infrastructure financing arrangements in place. The problem
will not be solved until households do not have to spend any
more than three times their annual income to house
themselves.

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